The German real estate market remains highly attractive to foreign investors. An increasing number are structuring their acquisition of shares in foreign companies that own real estate in Germany, sometimes through interposed companies. A share deal offers several advantages for nonresidents selling real estate. For instance, there are some opportunities to avoid the German real estate transfer tax (RETT). Foreign-headquartered MNEs also commonly invest and operate in Germany via lower-tier subsidiaries that own real estate for their business operations.
Until last year it was possible for nonresidents to avoid German income taxes on the sale of shares in nonresident real-estate-rich companies.
New German Income Taxation for Nonresidents Selling Real Estate
Under the Annual Tax Act 2018, Germany now taxes nonresidents in the event of a disposal of shares in a nonresident corporation that directly or indirectly holds immovable property in Germany:
- A foreign-to-foreign share disposal can take the form of a sale or contribution of shares and a liquidation or capital decrease of a (nonresident) corporation. The transfer of shares held by a partnership is also affected.
- The disposal of shares in a (nonresident) corporation must occur after December 31, 2018.
- Immovable property includes land, buildings, ships, aircraft, and rights equivalent to land which are subject to the provisions of land law. Movable property that is intended to serve the economic purpose of land, building etc. can also be regarded as immovable property.
- Extended German income taxation for nonresidents applies to sales of shares in resident or nonresident corporations that are rich in immovable property in Germany. A corporation is defined as immovable-property-rich if at least 50% of the value of the shares sold derives, directly or indirectly, from immovable property in Germany. The immovable property richness must be given at any time during the 365 days preceding the disposal.
- The immovable property richness must be determined based on the gross asset value. This means that debts and other liabilities are not taken into account. Book values are used, which were recognized at the time of the share disposal.
- The gross asset value must be assessed on a consolidated basis. Thus, assets matched by an intercompany liability and holdings in subsidiaries are excluded.
- Capital gains are taxable only if the nonresident seller’s direct stake is at least 1% or has been at least1% at any time in the 5 years preceding the disposal. Any shares held by parties related to the nonresident seller will not be taken into account.
- The entire gains from the disposal of shares in a corporation are considered. This means no apportionment of gains attributable to the immovable property in Germany applies.
- The extended nonresident income taxation of nonresidents selling real estate is limited to the portion of capital gains that are attributable to changes in values after December 31, 2018. This will be achieved by rebasing values at January 1, 2019.
- No exemptions are granted for gains derived from the disposal of shares in corporations that are listed on a stock exchange. Also, no trading exemptions apply to soften the impact of the new rules for immovable property-intensive trading activities. Neither are any exemptions in place for disposals between related parties.
- Corporate shareholders benefit from a 100% exemption of capital gains earned on the disposal of shares. However, corporate shareholding exemption may not apply to the capital gains of banks and insurance companies. Capital gains from the disposal of any shares are still not taxable for investment funds.
- The provisions contained in most modern German income tax treaties resemble those set out in Article 13(4) of the OECD Model Convention 2014. However, these provisions partly deviate from the new domestic provisions.
- German income taxation of capital gains may also be triggered at the time of the restriction or exclusion of Germany’s rights to tax gains from future disposals of shares. Various situations can trigger such a deemed share disposal, such as changes or fluctuations in the composition and valuation of a corporation’s underlying assets. Deemed share disposal can also be triggered by the initial conclusion or amendment of German income tax treaties in the view of the authorities.
- Nonresidents are obliged to file a tax return with the competent tax office. Late filing penalties may apply. The purchaser is not subject to any reporting requirements. It does not have to withhold and remit taxes in connection with share disposals.
Impact on Nonresidents
Extended nonresident income taxation brings into sharper focus nonresidents selling real estate and foreign-to-foreign transactions with an indirect disposal of real estate in Germany (offshore indirect transfer). Affecting the entire chain of nonresident entities above the entity that directly holds immovable property in Germany, the lack of trading exemptions, setting the bar at 1% minimum ownership at any time in the five years preceding the indirect disposal, and capturing deemed share disposals all significantly broaden the scope of nonresident income taxation in Germany. Difficulties dealing with minority shareholders, valuation issues, and how double or even multiple taxation can be avoided have been ignored. Extended nonresident income taxation presents compliance challenges for nonresident investors and foreign-headquartered multinational corporations with real-estate-intensive business operations in Germany.